Gas boom won't offset coal tax losses

CHARLESTON, W.Va. -- It could be tough going for the state's energy economy for the foreseeable future, as increases in natural gas production will fail to offset declines in coal mining, Deputy Revenue Secretary Mark Muchow told legislators Monday.

Muchow said natural gas production would need to increase by 60 percent to offset each 10 percent decline in coal production to maintain state severance tax collections.

While the Marcellus Shale boom increased West Virginia natural gas production by 37 percent last year and 25 percent this year, Muchow said a sharp decline in natural gas prices has caused severance tax collections for natural gas to actually drop more sharply than coal severance taxes.

"Even though natural gas production is increasing, the decrease in price more than offsets the increase in production," he told a legislative interim committee on finance.

With coal production down 7 percent for the year to date, Muchow said West Virginia will see an overall 15 percent drop in severance tax collections, from $490 million in 2011 to about $426 million this year.

Coal production is expected to continue to trend downward, as more coal-fired power plants nationally are retired or converted to natural gas, he said.

Over the next four years, coal-fired plants amounting to 8.5 percent of current electrical generation capacity will be retired or retrofitted, he said.

"Other sectors of the economy are going to have to step up," he said of the decline in the state's energy tax collections.

Muchow said he anticipates growth in the wood products industries in the state, as the housing market begins to rebound nationally.

"Basically, the housing industry has no place to go but up," he said.

He also said market forces are driving development of natural-gas-powered vehicles, which eventually will increase demand for natural gas.

Muchow said West Virginia could be a leader in that area, with what is probably the most generous tax credit for natural-gas vehicles in the country.

Passed in 2011, it provides a tax credit of 35 percent of the purchase price or 50 percent of conversion costs, up to $7,500, for natural gas-powered passenger vehicles.